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Cost To Create Approach (Leapfrog Start Up)

Sometimes companies or individuals will purchase a company just to avoid the difficulties of starting from scratch (see section II. Leapfrogging Startup sub section). A value based on this approach will usually be generated by the buyer. The buyer will calculate his or her start up needs in terms of dollars and time. Next he or she will look at your business and analyze what it has and what it may be missing relative to the buyer's start up plan.
The buyer will calculate value based on his or her projected costs to organize personnel, obtain leases, obtain fixed assets, and cost to develop intangibles such as licenses, copyrights, contracts, etc.)

A premium of 10% or 15% above the sum of projected start up costs may be offered because of the effort being saved by the buyer.

If the business being created is one that has a high failure rate and the business has already had great success, the risk of failure must also be included in the Cost to Create calculation. For example, a lottery ticket may cost only $1, but one that has last week’s winning number on it may be worth millions. In businesses such as the creation of complex software, where a significant percentage of projects run over budget, behind schedule, or just fail the elimination of uncertainty can have significant value.

As a practical matter, this approach is not very common. A business that is profitable will sell for a higher amount than this approach would justify. A business that is not profitable may have flaws that would discourage its purchase; the buyer would be inheriting the flaws such as bad location, bad reputation, production problems, etc. Its primary use is in situations where no other method is appropriate, or in combination with other methods of valuation.